One Wall Street agency downgrades Kentucky's rating

06/17/2010 11:40 AM

Kentucky Capitol

Fitch Ratings downgraded Kentucky’s bond rating this week, citing the commonwealth’s “depleted” reserves, the delayed effects of the recession and the reliance on Congress extending a Medicaid program reimbursement increase for another six months.

Fitch is now giving Kentucky an “AA-minus,” down from an “AA” rating on the $4.9 billion of general fund bonds for state agencies that are contained in the 2011-12 budget the General Assembly passed last month.

It’s a slight downgrade. The “AA” level — the second-highest rating for municipal bonds — means a state has a “very strong” capability of keeping up with payments on the bonds. An “AA-minus” puts the state a half-step away from the “A” level, which signifies a “strong” capability to repay the bonds. “AAA” is the highest rating level.

“I don’t think it will hurt us too much in the short term,” said Rep. Bob Damron, a Nicholasville Democrat who works for the Kentucky-based financing firm Ross Sinclaire Associates. He said the rating agencies Moody’s and Standard & Poor haven’t downgraded Kentucky but did give the commonwealth a “negative outlook,” which is like a warning.

“Right now it’s not going to have a huge impact, but it could be a concern down the road,” he said.

For instance, it could come into play as Kentucky tries to refinance and restructure its debt from previously-sold bonds that are paying for hundreds of millions of dollars of construction projects.

That process will lower the payments but extend the number of years Kentucky will be paying for those bonds, said state Sen. Tom Buford, a Nicholasville Republican.

He said Fitch’s downgrade was “not good” news for Kentucky.

Specifically, Fitch explained the rationale for downgrading Kentucky on several key points:

  • Depleted budget reserves
  • Continued reliance on debt restructuring to save money
  • The General Assembly making the assumption that Congress will extend the Medicaid reimbursement increase for another six months through June 30, 2011. If it doesn’t Kentucky will have a $238 million hole in its spending plan.
  • Total debt levels — roughly 6.8 percent of the state’s revenue — are “at the higher end” of its traditional range
  • Kentucky’s economy “entered the recession later than its neighboring states and the national as a whole,” which could cause revenue to continue to fall or stay stagnant.

- Ryan Alessi


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